U.S., China Compete for Influence in Cuba

WASHINGTON—As the Obama administration works to expand economic relations with Cuba, it is competing for influence with a familiar rival: China.

Since the White House embarked on restoring relations with Cuba—an effort culminating in President Barack Obama’s historic visit next week—the U.S. has run up against China’s efforts in recent years to build an economic relationship with the country.

China’s trade with Cuba grew by 57% in the first three quarters of 2015 to $1.6 billion, rebounding from an usually weak period the year before, according to Beijing. Direct flights from Beijing to Havana started in December. And China is leading efforts to build Cuba’s Internet infrastructure.

“You have Chinese influence really across the board,” said Richard Feinberg, a former U.S. diplomat who studies the Cuban economy at the University of California, San Diego, and the Brookings Institution in Washington. “From the Cuban point of view, they’re still paranoid about America.”

Though China is Cuba’s second largest trading partner, it is far behind Venezuela, illustrating the limited business opportunities for most countries under Cuba’s current system. Joint ventures and foreign direct investments from China are relatively small—though plans for a cluster of resort properties are estimated to be worth $460 million, including a luxury housing project near the Marina Hemingway that will house Chinese tourists.

But China’s investments in Cuba are likely to grow, said Xu Shicheng, a leading Chinese expert on Cuba at the state-backed Chinese Academy of Social Sciences, as a loosening of U.S. restrictions opens Cuba’s access to the broader, global economy.

“This improvement in relations between Cuba and the U.S., if it brings about a relaxing of restrictions, would benefit future Chinese investment in Cuba,” he said.

Unlike other places where Washington and Beijing compete for influence, Cuba’s cultural attachment and proximity to its American neighbor may offer a potential advantage to the U.S. The White House is betting that connection will help Washington rival Beijing not only in economic influence, but also in the battle for the country’s political future.

Those dynamics loom large as a series of deals with major American companies work through U.S. and Cuban pipelines ahead of Mr. Obama’s visit. Several major U.S. companies are poised to secure deals that give them a foothold in Cuba, including AT&T. On Thursday, the U.S. Postal Service said it had resumed direct mail service with Cuba for the first time in more than 50 years, while Cuba said it would lift a 10% penalty on dollar exchanges.

Most advances for American companies have been in the tourism industry. The Obama administration has granted particular leeway for telecommunications firms in loosening regulations. But the most notable achievements there have been roaming agreements that benefit American travelers.

Lingering tensions between the U.S. and Cuban governments remain notable in the telecommunications industry. Mr. Obama has authorized U.S. telecommunications companies to operate in Cuba. But Havana has resisted.

China, on the other hand, leads in helping to build Cuba’s Internet framework, although there likely are future opportunities for U.S. companies, in part because Cuba’s existing, planned system is already outdated, said Larry Press, a professor at California State University, Dominguez Hills, who writes about Cuba’s Internet infrastructure on his blog, The Internet in Cuba.

“The biggest opportunity isn’t going to be in the short-run,” Mr. Press said. “The Wi-Fi they’re rolling out is today’s Wi-Fi. The home connectivity, the DSL they’re talking about rolling out is yesterday’s home connectivity.”

Cuba announced in January that it was launching a pilot project to provide broadband home Internet access in Old Havana. Residents there, as well as cafes, bars and restaurants, will be able to order service through fiber-optic connections operated with Chinese telecom operator Huawei Technology Co. Ltd.

Huawei equipment also was used in the installation last year of dozens of Wi-Fi hot spots across Cuba. In January, Cuban state telecommunications company Etecsa said it would open 30 more Wi-Fi hot spots in Havana alone. But for most Cubans, access to these hot spots remains expensive at $2 per hour.

Overall, U.S. officials have said Cuba has responded coolly to American telecommunications proposals, including from Google and other companies, saying they want to move forward on their own terms.

“Partly that’s a result of the fact that historically we’ve tried to use telecommunications as an avenue to undermine their government, and so consequently they really don’t trust our hardware,” said William M. LeoGrande, a professor of government in the School of Public Affairs at American University in Washington, D.C., who has written a book on U.S.-Cuba relations.

Cuban officials’ reluctance to broaden Internet access stems in part from fears about losing the tight controls they wield over data access. These suspicions aren’t totally without merit. The U.S. in the past has launched digital efforts to try to undermine the Cuban government, including Zunzunzeo, a Twitter-like service whose users didn’t know the service was sponsored by Washington.

“If this is a national-security issue, I want to do business with my ideological partners or allies, not with what I see now as the enemy or the Trojan horse,” said Ted Henken, a professor at Baruch College, City University of New York, who has studied social media and the Internet in Cuba.

China has been investing in Cuba over several years, although its ventures haven’t always been lucrative, according to Mr. Xu of the Chinese Academy of Social Sciences.

The U.S. embargo has made it difficult for Chinese factories in Cuba to sell their goods in the region, while Cuba’s restrictive rules on foreign investment make it hard for Chinese companies to hire the workers they want or send money back to China, he said.

China’s Ministry of Foreign Affairs didn’t respond to a request for comment.

The competition between the U.S. and China extends beyond Cuba into the region more broadly. The U.S. is playing catch up in Argentina, where Mr. Obama will visit after spending just short of three days in Havana.

Over the past decade, China increased commercial and diplomatic ties as Argentina’s government eschewed U.S. policy initiatives in favor of Beijing.

In 2014, Chinese President Xi Jinping visited Buenos Aires and pledged to loan Argentina $7.5 billion at a time when Argentina couldn’t tap credit markets because of a legal dispute with U.S. bondholders. The China Development Bank agreed to lend Argentina nearly $5 billion to build two hydroelectric dams in Patagonia. A Chinese company previously had won a highly criticized auction in Argentina to help construct the dams.

Opposition legislators were critical of the deals, arguing that the dams were unnecessary and too costly. President Mauricio Macri’s government, also skeptical about the agreements, has been studying them. But aides to Mr. Macri say he will likely let the deals go forward, partly out of concern about antagonizing China.

More controversially for U.S. officials, Argentina’s Congress voted last year to let China build a space station antenna in the province of Neuquén, giving China the right to use the station for 50 years. U.S. officials have voiced concerns about the nature of the antenna, fearing it could be used for both civilian and military purposes. Argentine officials have played down those concerns, saying the facility is strictly for civilian scientific purposes.

Last November, the countries agreed to a deal that would have China build two nuclear power plants in Argentina. The $15 billion deal would be financed mostly by China.

Mr. Obama is seeking to reset U.S. ties with Argentina following the election of Mr. Macri.

In time, the Obama administration’s policies on Cuba might make China less attractive as an investor in Latin America, said Jason Marczak, a Latin America expert at The Atlantic Council who has studied China’s role in the region.

“By opening up with Cuba we’ve cast aside the veil of imperialism that has oftentimes befuddled us, and shown that we can really be a partner with the rest of the region,” he said.

Written by Carol E. Lee and Felicia Schwartz of The Wall Street Journal

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